What Does “Qualifying Rate” Really Mean?

If you’re looking to buy a home and need to get a mortgage you will first need to qualify. Qualification gives the lender confidence that you have enough income, low enough debt, and a good enough track record of paying off debt to be a low-risk borrower. If you don’t have the conventional mortgage down payment amount of 20% to contribute, you will need to get an insured mortgage and qualify at the current qualifying rate.

What does “qualifying rate” mean?

To qualify, you need to prove that you can afford a payment at a higher rate to ensure borrowers that you can cover payments if the rates increase. For example, if the mortgage rate that a lender has posted is a 2.50% 5-year fixed mortgage, they will require that you qualify at a higher rate. Right now the benchmark qualifying rate required by CMHC is the Bank of Canada (BoC) benchmark rate of 4.64%. This is part of the new Mortgage Stress Test rules which came into effect last fall.

Why do lenders require you to qualify?

Lenders use qualifying rates to ensure that your debt ratios are low enough to cover the payments. If interest rates rise, lenders do not want people defaulting on their mortgages.

Are your payments affected?

No, your payments will still be based on the contract rate that you are quoted and not the qualifying rate.

What is the current qualifying rate?

The current qualifying rate is the Bank of Canada’s posted 5-year fixed rate. This rate is posted each Thursday, but has remained stable at 4.64% since the fall of 2016.

Why is this benchmark rate used?

The Bank of Canada establishes their rate by using the average of the 5-year rates that are posted by the six biggest banks every Wednesday to set the official benchmark rate on Thursday.

Are there other options available?

Your mortgage broker can connect you with non-traditional lenders that may use lower qualifying rates, such as credit unions or alternative lenders. This will depend on the loan-to-value rate set by the particular lender, and the lender’s criteria for you to qualify at these lower qualifying rates. Remember, the qualifying rate is used to determine how much you can afford and if you can meet the monthly payments should interest rates rise. The lender will also consider your gross debt service and total debt service ratios to determine if you can meet their criteria. To help you get ready for qualifying you can seek the advice of professional mortgage advisors, who can review your financial situation and help provide you the information and advice you need.